The open offer from Diageo for 26% of the equity shares of United Spirits at a price of Rs 1,440 opens on Wednesday the 10th of April and closes on Friday the 26th of April. The permissions and clearances have taken quite some time and the open offer was therefore delayed. The current market price of shares is Rs 1,755.50 as of close on the BSE on Friday the 5th of April, implying a premium of Rs 315.50 or 21.9% to the open offer price. Looking at the price premium it appears that the open offer is unlikely to succeed.

Some facts and figures about the open offer :

The proceeds from the preferential share allotment envisage that a sum of Rs 1,600 crs would be used for repaying the indebtedness of the company.

The promoter and promoter group hold a total of 27.58% of the shares of the company. Of the promoter holding as much as 97.94% are pledged or encumbered. These shares are pledged with Indian PSU banks and also private banks. The private banks encumbrance market value is more than the loans that they have given, or in other words even at today’s market rate they hold more security than money lent.

State Bank of India who is the leader of the consortium of banks has sold roughly 1/3rd of the 27 odd lakh shares that they held as collateral. They have also sold about 1 cr shares of group company Mangalore Chemicals in a bulk deal. Mr Mallya had approached the Mumbai high court to get interim relief and restrict the banks from selling shares which was declined.

Looking at the current market price which is trading at a premium of over 22% currently there is no way shares of the target company would be tendered by investors in the open offer. The moot question is whether the private lenders who have collateral higher than the money lent could be cajoled into parting with the shares in the open offer and atleast completing the formality of fulfilling the obligation that Mallya has entered with Diageo. Alternatively they could release these shares to Mallya who could then sell these shares to Diageo and fulfil the contractual obligation of 17.4% stake sale. There is also an issue where the personal guarantee of Mr Mallya has been issued in favour of SBI. One is not sure what would be the stand of the courts once this personal guarantee is invoked.

The whole issue is in a state of mess and there seems to be no clarity. There are two moot issues here. One is the fulfilling of the shareholders agreement between UB Group of selling and delivering unencumbered shares of 2.52 cr representing 17.54% of the equity capital. These shares are more or less encumbered. MrMallya needs to pay for them, release them and then offer the same to Diageo. The second issue is the tendering of shares by the public shareholders who hold as much as 72.42% with FII’s holding or institutional holding in excess of 52%. Why would these people tender shares at a discount to the market.

This would be an interesting case and I am sure that in future this would be a case which would be discussed at Business Schools. The case would be keenly watched and it would be imperative to see moves made by Mr Mallya to release his shares and the way the private banks enforce their collaterals. It’s very clear that the way things stand it appears almost impossible that Diageo could succeed through this open offer to acquire the stated objective of achieving a shareholding of 53.4% post the open offer completion.